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Wednesday, November 14, 2018

OPEC becoming increasingly important


OPEC 10's share (excluding recent new members) of world oil production was some 40% of world oil production in 1965 (before the formation of OPEC). It increased to some 50% in 1973/1974, and declined to 27% in 1985, when both the tanker market and the oil market were at their lowest. It then increased to some 40% in 1992 and has virtually maintained that level since.


Oil production of the biggest oil producer in OPEC, Saudi Arabia, has now reached the level attained in 1980/1981. The graph above shows that the oil production of Saudi Arabia increased from some 3.6 mbd in 1985 to almost 9 mbd in 1991 and has remained at 9-10 mbd ever since.



 According to the Energy Information Administration (EIA), OPEC surplus oil production capacity, which is virtually the world surplus production capacity, has varied strongly over recent years from some 2.4 mbd in 1997 up to 5 mbd in 2000, then down as low as 1.0 mbd in 2005. The 1.6 mbd figure for 2008 is down from 2.1 mbd in 2007, and well down from the almost 3 mbd forecast for 2009. The combination of low OPEC surplus oil production capacity, relatively low world oil stocks and political unrest in several major oil producing countries explains today’s record high oil prices.


OPEC crude production in the second quarter of 2008 averaged an estimated 32.3 mbd, up only slightly from 32.2 mbd in the first quarter. Higher production in Iraq and Angola more than offset lower production in Nigeria caused by security problems and worker strikes. Assuming that Saudi Arabia's announcement of raising July output to 9.7 mbd results in a higher sustained rate of production until at least September - OPEC crude production is projected to average 32.7 mbd during the third quarter.


At these production levels, available surplus production capacity during the third quarter would be only 1.2 mbd, marking the third consecutive quarter in which surplus capacity stood at or below 1.5 mbd. All of this capacity is held by Saudi Arabia. Any industry operating at close to 99% percent of capacity will remain vulnerable to unexpected events that either boost consumption or disrupt production. Such events would place additional upward pressure on prices and contribute to oil price volatility.


Non-OPEC oil production increased on average by more than 4% annually from 1965-1988 to 44.7 mbd, declined to 39.6 mbd in 1993, and increased to some 50.3 mbd this year. The rate of increase since 1993 has, however, only been on average 1.5%. The rate of increase since 2000, during a period of very strong oil prices, has only been 1.2%. According to the EIA, faster declines in older fields and delays in expansion projects have limited supply growth.


At the beginning of this year, non-OPEC supply growth was projected to rise by 0.86 mbd in 2008 and by over 1.5 mbd in 2009. Production is now expected to rise by only 0.23 mbd in 2008 and by 0.83 mbd in 2009. Lower-than-expected production from Russia and the North Sea, along with lowered expectations for Brazil, are the principal reasons for the lower non-OPEC supply levels.


In the second half of 2008 non-OPEC supply is expected to increase by about 0.7 mbd, driven by growth in Brazil and Azerbaijan. Given recent history, possible additional delays in key projects, as well as accelerating production declines in some older fields, cannot be ruled out. As a result, net non-OPEC production gains could be less than the current forecast, leading to both greater demand for OPEC oil and higher prices than currently projected.



The high oil prices mean that the freight part of the landed oil price has declined from some 12% in 2004 to some 5% in 2006 to just over 2% now. It has never been lower. This indicates that the oil companies would rather have low stock and pay high freight rates than vice-a-versa. The freight element has virtually become an insignificant part of the CIF oil price. The just-in-time low stocks may be benefiting the tanker market.


The high oil prices have naturally boosted the revenues of the OPEC countries from a level below USD 200 bn up to the year 2000, to an estimated USD 1,250 bn this year (the figures for this year include the countries that have joined in recent years). For the older OPEC members the nominal revenues have increased more than five times. Even with the lower dollar values, such increases will probably contribute to enhance both the economic and political influence of the oil producing countries.




 The real income per capita in the OPEC countries has not increased since the peak in 1980. This is partly due to inflation and partly due to the increase in population in these countries. The OPEC per capita net oil export revenues vary widely among the OPEC countries from USD 28,157 in Qatar, and USD 21,858 in Kuwait - the two richest countries - to USD 14,150 in UAE, USD 7,031 in Saudi Arabia and USD 6,712 in Libya, the three next-richest countries (2007 figures). The per capita revenues among the other 8 OPEC members vary from USD 3,566 in Angola down to USD 411 in Nigeria and
-USD 8 in Indonesia.


Contact: Erik Ranheim